Morgan Stanley to Sell Oil Merchanting Unit to Russia’s Rosneft

Dec 20, 2013 5:32 pm ET

Dec. 21 (Bloomberg) -- Morgan Stanley agreed to sell a unit that stores, trades and transports oil products to a subsidiary of Russia’s OAO Rosneft as the investment bank backs away from owning some physical commodities businesses.

The sale of the global oil merchanting business is expected to be completed in the second half of next year, New York-based Morgan Stanley said yesterday in a statement that didn’t disclose financial terms. The firm also said it’s exploring strategic options for its stake in TransMontaigne Inc., the Denver-based petroleum and chemical transportation and storage company.

Morgan Stanley Chief Executive Officer James Gorman, 55, has been deciding what to do with the commodities business for more than a year amid lower revenue and more scrutiny from regulators. He’s also seeking to shrink the amount of capital dedicated to the fixed-income and commodities division in his quest to boost return on equity.

“We view this as positive, as it moves Morgan Stanley closer to shrinking the less profitable, lower ROE parts of its FICC business,” Brennan Hawken, a UBS AG analyst, wrote in a note to investors. “New capital requirements on these commodities businesses mean sufficient ROEs will be difficult to realize, even if the cyclical headwinds become tailwinds.”

Chemical Tankers

Rosneft, Russia’s largest petroleum producer, is buying Morgan Stanley’s physical oil inventory and related purchase, sale and supply agreements, according to the statement. The deal includes oil-terminal storage agreements and the bank’s 49 percent stake in Heidmar Holdings LLC, which manages about 100 oil and chemical tankers.

About 100 front-office executives in the U.S., U.K. and Singapore, or one-third of Morgan Stanley’s total commodities front-office personnel, will move to Rosneft, according to the statement.

Regulators and lawmakers have questioned the role of banks in physical commodities businesses, saying they could pose catastrophic risks to the firms that could lead to their collapse and public bailouts. The Federal Reserve is examining legal and regulatory exemptions that allow banks to participate in the commodities markets, a person briefed on the process said in October.

The sale, which Morgan Stanley said won’t be material to its financial results, doesn’t include the firm’s client facilitation oil-trading business. That will still allow the bank to trade with clients that want to hedge or speculate on oil and to accept physical delivery.

Greenshields, Bryce

Morgan Stanley’s commodities operations, run by Simon Greenshields and Colin Bryce, both 57, include a large gas and power unit and a smaller metals subsidiary. In 2011, oil accounted for about 45 percent of the business, Nomura Holdings Inc. said in a research note at the time.

Commodity trading revenue at the 10 largest global investment banks fell 18 percent in the first nine months of the year to $4 billion, industry analytics firm Coalition Ltd. said in a report this month. Greenshields and Bryce said in an internal memo in June that Morgan Stanley was in the top two in commodities revenue.

Still, the commodity business posted a return on equity of less than 5 percent in 2012, the lowest among its trading businesses. The firm cut 10 percent of its workforce in the division this year and held talks in 2012 with Qatar’s sovereign-wealth fund about selling a stake in the business.

Gorman’s Goal

The sale advances Gorman’s goal of reducing the capital dedicated to the fixed-income and commodities business to half of what it was in 2011 by 2016. The deal is expected to trim $1 billion to $5 billion of risk-weighted assets under new global capital rules, said a person briefed on the terms who asked not to be named because the figures weren’t disclosed.

The fixed-income and commodities division had $213 billion in risk-weighted assets, or RWAs, at the end of September, down from more than $250 billion at the end of 2012. Gorman has set a goal of fewer than $180 billion in RWAs by the end of 2016.

Demand for storage has been waning because current prices for crude and heating oil are higher than the price sellers can lock in through derivatives such as futures contracts for deliveries in 2014 or 2015, according to data compiled by Bloomberg. That creates an incentive to sell inventories of oil or oil-based products immediately rather than holding them.

Precious Metals

JPMorgan Chase & Co., whose commodities units are overseen by Blythe Masters, said in July it may exit businesses after the Fed announced its review. The largest U.S. bank could sell or spin off holdings including warehouses, stakes in power plants and trading in materials such as gas and coal. The New York- based firm said it will continue trading commodity derivatives as well as storing and trading precious metals.

State-run Rosneft became the world’s largest publicly traded oil producer by volume after completing the $55 billion purchase of TNK-BP, Russia’s third-biggest producer, in March. The takeover enabled CEO Igor Sechin to lift oil output to almost 4.2 million barrels a day, surpassing the output of every member of OPEC except Saudi Arabia.

Rosneft, whose biggest shareholders are the Russian government and BP Plc, is more profitable than every other major international oil company except Chevron Corp., according to data compiled by Bloomberg.

Rosneft’s estimated 2013 profit margin is 9.9 percent, compared with 7.5 percent for Exxon Mobil Corp., the world’s largest energy producer by market value, and 4.8 percent for Royal Dutch Shell Plc, the data show. Chevron’s estimated full- year margin is 10.3 percent.

Sechin, a former Soviet spy and ally of President Vladimir Putin, has been expanding the company’s reach outside of Russia through exploration ventures from the Gulf of Mexico to the Middle East with companies such as Exxon, Statoil ASA and Eni SpA. Sechin was the deputy prime minister in charge of energy policy a decade ago when most of the assets of Mikhail Khodorkovsky’s Yukos Oil Co. were seized for back taxes and transferred to Rosneft.

--With assistance from Joe Carroll in Chicago. Editors: Rick Green, Steve Dickson